Abstract
Repurchase agreement (repo) markets are crucial to financial stability and monetary policy transmission. Recently, unexpected large spikes in U.S. dollar repo rates have posed challenges to the Fed's balance sheet policy. This paper presents a theoretical model that explicates the impact on repo rates of strategic complementarity in intraday payment timing among banks. I show that repo rates can have huge spikes despite only small or moderate changes in macroeconomic conditions. This sheds new light on the amount of reserves in the banking system required to support smooth functioning of payments and short-term funding markets.
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